-Countries that practice civil law will be less likely to benefit from legal action -Due to less effective legal protection - strength of law, vigor of enforcement, stringency of disclosure requirements -Hostile takeover -Leveraged buyout -Competitors already know how company should be run -Voting rights - vote for board of directors (usually made by existing board; doesn’t really work) -Doesn’t work with civil law -> concentrated shareholders -> harder to takeover -Activist investors -> temporary concentrated shareholder -> has specific thing in mind; get thing done, rise price of stock, then leave Exit is another option - it is possible in the US because secondary markets are liquid and large, whereas not in other countries where the majority of shares are held by one entity. B. Read “Mutual funds are failing as deal police” (Item 15.15) and “Efficient Markets Need Guys Like Me” (Item 15.14) and answer the following: Summary of 15.15:
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-Public pension funds stand alone as effective monitors of corporate merger activities; when public pension funds hold large stakes, companies are less likely to conduct mergers, and their acquisitions are more likely to succeed -1% increase in stake held by largest public pension fund investor = 4% decline in frequency of mergers; 8% decrease in value-destroying acquisitions; better in long run after acquisitions -Mutual funds encourage merging - not acting in interest of shareholders; “buying” growth -Mutual funds executives argue that they prefer to “vote with their feet”; instead, Qiu’s study indicates a tendency among mutual funds to hear-no-evil-see-no-evil in mergers (conflict of interest with companies whose services they oversee or seek) 1. If many mergers and acquisitions lower the market value of the companies involved, why do they nonetheless take place? -M&A take place because executives want to “buy earnings or revenue growth rather than generate growth internally and organically”. -Companies may merge or acquire with the intention of increasing the size of their business and their economic power, but this may not translate to efficiency through economies of scale or increased market power. -Interest for the managers -Running a bigger company, get more money -Worst thing they can do: be lousy managers (not firing themselves) 2. The article presents evidence that mutual funds ‘neglect their responsibility to their investors’ by failing to monitor the managers of companies in which they hold substantial stakes; in contrast pension funds (especially public pension funds) seem to do a better job. Can you explain this difference? -Mutual funds have close relationships with the management of the institutions they invest in, so are not incentivized to try to intervene and often look away.
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